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German inflation slows ahead of crucial ECB meeting

Monday, January 5, 2015 - 19:24

German inflation looked set to fall further in December, according to data from several states, raising pressure on the European Central Bank to unveil unconventional new measures to boost prices at a closely-watched meeting later this month.

PHOTO: REUTERS

[BERLIN] German inflation looked set to fall further in December, according to data from several states, raising pressure on the European Central Bank to unveil unconventional new measures to boost prices at a closely-watched meeting later this month.

Data from five German states released on Monday morning showed across-the-board declines in the annual inflation rate in December, largely a result of falling energy prices.

Prices in the big state of North Rhine-Westphalia inched up just 0.1 per cent, down sharply from a 0.7 per cent rise in November.

In Bavaria, prices rose 0.3 per cent year-on-year, down from 0.8 per cent. In Hesse, annual inflation fell to zero from 0.5 per cent in the prior month, while in Baden-Wuerttemberg inflation slowed to 0.1 per cent from 0.5 per cent previously.

A preliminary pan-German inflation figure for December is due to be released on Monday at 1300 GMT. Broader inflation data for the entire 19-nation eurozone is due on Wednesday.

The evidence of slowing German inflation came days after ECB President Mario Draghi gave an extensive interview in German daily Handelsblatt in which he warned that the downside risks to price stability had risen over the past half year.

He also confirmed that the ECB stood ready to introduce new measures if necessary in early 2015. Speculation is rife that Mr Draghi could unveil plans for mass purchases of eurozone government bonds - a step known as quantitative easing (QE) - to ward off the threat of deflation.

The slowing German inflation data could give him additional ammunition to convince wavering members of the ECB's Governing Council to back QE, though Bundesbank President Jens Weidmann has signalled that he will oppose such a step.

Jennifer McKeown at Capital Economics said in a research note that although the German decline was largely due to energy, the broader eurozone figure on Wednesday was likely to be negative for the first time since October 2009, making it difficult for the ECB to stand pat.

"Such a development would surely make the pressure for the ECB to implement quantitative easing at its January meeting irresistible," she said.

The big question for the markets is how the ECB might structure a QE programme - for example whether Greek bonds will be included given uncertainty over who will emerge victorious from an election being held on Jan 25, three days after the next ECB meeting.

The far-left Syriza party, which has vowed to reverse the austerity measures that were a condition for Greek bailout packages totalling 240 billion euros, holds a narrow lead in opinion polls.